I have a 150-acre farm and $250K in debt. How do I budget in such a volatile industry?

Dave,

I have a 150-acre farm, and I recently began running my operation debt-free. The problem is that I have $250,000 in debt from bad financial decisions in the past. Plus, the varying expenses in my business make it difficult to operate on monthly budgets. Do you have any suggestions for budgeting in volatile industries like mine?

Tyler

Tyler,

Obviously, you want to set up a separate budget and run a profit and loss statement. You’ll want to estimate the income, as best you can, for the year, and you’d need to estimate your expenses item by item and category by category for the year. Then, you’ll want to break that down by month. This is called laying out a business pro forma. In other words, a business budget.

Next, you’ve got two goals to work toward with your profits. By profits, I mean after you’ve paid household expenses. That includes a living wage, enough to operate, keeping food on the table, the lights on and that sort of thing. After basic living expenses are out of the way, your net profit in the business should be divided between retained earnings—which is savings—and debt reduction. The idea here is that you’re going to put the lion’s share toward paying off debt. Still, you need to have something set aside for a rainy day. In your case, that could be taken literally.

Keep in mind that in business, retained earnings are used for more than just emergencies. They’re also for buying equipment, more land and anything else that will grow your operation. But you always want a pad in there for that and other reasons. What if you have a strange year, and your budget estimates were way off? It could be unexpected expenditures or the fact that you simply had a bad year. In business, that’s called an emergency, and you’d take that out of retained earnings.

Doing a budget, whether it’s in personal finance or a business, is something that gets easier and more accurate with time. You won’t get everything right the first couple of tries, but over time your estimates and budgeting skills will become more accurate because they’ll be based on experience.

— Dave